Chapter 32: A Macroeconomic Theory of the Open Economy

Flashcards outlining key economic concepts relevant to the theory of open economies, focusing on loanable funds, capital flow, interest rates, and trade policies.

Loanable Funds Market

A market where the supply of funds from savers meets the demand for investment by borrowers.

Net Capital Outflow (NCO)

The net flow of capital out of a country in a given period; it reflects investments abroad minus foreign investments in the country.

Real Interest Rate (r)

The nominal interest rate adjusted for inflation, representing the true cost of borrowing.

Government Budget Deficit

A situation where government expenditures exceed its revenues, leading to borrowing.

Net Exports (NX)

The value of a country's exports minus the value of its imports.

Exchange Rate (E)

The price of one currency in terms of another currency, influencing trade and capital flows.

Capital Flight

A large and sudden outflow of financial assets from a country, often triggered by political instability.

Trade Policy

Government policies that influence the amount and types of goods and services imported or exported.

Investment Tax Incentives

Policies that provide tax reductions to encourage businesses to invest in capital.

Budget Deficit vs. Investment Incentives

Both result in rising interest rates and decreased net capital outflow, but investment incentives can enhance productivity growth.

Tariff

A tax imposed on imported goods, aimed at protecting domestic industries.

Import Quota

A limit set by the government on the quantity of a specific product that can be imported.

Exchange Rate Appreciation

An increase in the value of one currency relative to another, which can decrease net exports.

Political Instability

A situation where a country's government is unstable, potentially leading to economic uncertainty and capital flight.

Foreign-Currency Exchange Market

A platform where currencies are traded, enabling the conversion of one currency into another.

Trade Deficit

When a country's imports exceed its exports, leading to a negative balance of trade.